IN RE LURIE

November 27, 1974

In the Matter of HARVEY LURIE, Bankrupt

The opinion of the court was delivered by: NEAHER

MEMORANDUM OF DECISION

NEAHER, District Judge.

The bankrupt ("Lurie") has petitioned for review of a bankruptcy judge's order denying him a discharge because of an objection filed by a judgment creditor, John P. Maguire & Co., Inc. ("Maguire"), pursuant to § 14(c)(3) of the Bankruptcy Act ("Act"), 11 U.S.C. § 32(c)(3).
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Of three specifications in Maguire's objection, the only one before this court, and the basis for this review, is specification 3.
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In sustaining it as a bar to Lurie's discharge, the judge's ultimate conclusion was:

"3. The bankrupt, while engaged as an executive of Pennant Knitting Mills, Inc., obtained money for Pennant from John P. Maguire & Co., Inc., in the sum of $52,872.69 by causing materially false statements to be made and published, in writing, respecting the financial condition of Pennant."
*fn3"

That conclusion rests upon a number of separate findings of fact and conclusions of law explained in the judge's accompanying memorandum, n. 3 supra. These were distilled from over 600 pages of testimony and numerous documentary exhibits. Factual findings must be accepted unless found "clearly erroneous" under the test of Rule 52(a), F.R.Civ.P. In re Davis, 404 F.2d 312, 314 (2 Cir. 1968); In re Tabibian, 289 F.2d 793, 795 (2 Cir. 1961); see Bankruptcy Rule 810.
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And where the credibility of the bankrupt is an important factor, "the scope of review should be relatively narrow." 289 F.2d at 795.

While Lurie's credibility was surely an issue before the bankruptcy judge, the court is of opinion that it cannot be viewed as a controlling factor in resolving the principal questions tendered by the creditor's objection. A searching review of the evidence discloses serious gaps in Maguire's prima facie showing, as well as material facts not dependent upon Lurie's credibility, which render clearly erroneous the critical findings as to Lurie's knowledge, intent and responsibility in the circumstances disclosed. For the reasons which follow, the court is convinced that on the whole record a denial of discharge to Lurie cannot be sustained and that the judge's order must be reversed. Bankruptcy Act § 2(a)(10), 11 U.S.C. § 11(a)(10).

Background Facts

The facts germane to the relationship between Lurie and Maguire which eventually led to this personal bankruptcy proceeding began in June 1968. Lurie, now a textile salesman for another company, was then employed as sales manager of Pennant Knitting Mills, Inc. ("Pennant"), a small manufacturer of knitted piece goods of which his former father-in-law, Selig Kaplan, was president, sole active officer and 50% stockholder. On June 4, 1968, Kaplan, in order to obtain needed working capital, executed a factoring agreement appointing Maguire as Pennant's "Factor with respect to all sales of its merchandise or rendition of services to customers in the United States and Canada" and assigning "all accounts receivable arising out of such sales or services." Pennant warranted in the agreement that each account receivable so assigned would be "based upon bona fide sale and delivery of merchandise or rendition of services" and "that the customer is obligated to pay the full amount at maturity without defense, counterclaim or offset; and that all documents in connection therewith are genuine".

Also on June 4, 1968, both Kaplan and Lurie, as the other 50% stockholder, executed individual guaranties of payment in favor of Maguire "[in] order to induce" the latter to enter into the factoring agreement. Lurie thereby agreed that if Pennant became insolvent or bankrupt, his obligations to Maguire under the guaranty would "forthwith become due and payable without notice"

Maguire promptly began advancing substantial amounts of cash to Pennant in exchange for the assignment of very much larger invoice billings to Pennant's customers due and payable in 60 days. For example, during June 1968, Maguire advanced $144,200 cash against assigned Pennant invoices totaling $221,886.09. Operations under the factoring agreement continued throughout the June-December 1968 period without incident, Pennant maintaining substantial credit balances which reflected the collectibility of its assigned accounts.

During this period Lurie, as Pennant's sales manager, negotiated a transaction with Robert Bruce, Inc. ("Bruce"), a large manufacturer of knitwear, which in prior seasons had supplied yarn to Pennant for conversion into knitted fabric for Bruce.
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The transaction was concluded on an entirely oral basis between Lurie and Bruce's technical director, Richard Selman, and called for Pennant's manufacture and delivery of knitted fabric to Bruce over a four or five month period extending into April 1969. There is no question that Pennant commenced shipping fabric to Bruce on November 29, 1968 and continued to do so throughout December 1968 and in January 1969. It is also unquestionable that the knitted fabric incorporated yarn of various colors and weights delivered to Pennant by Bruce for that purpose. Nor is there any question that Pennant's invoices to Bruce made no deduction for the cost of the yarn and that Pennant assigned them as accounts receivable to Maguire without informing the latter that it would have to pay Bruce for the yarn used.

On January 28, 1969, Bruce remitted full payment to Maguire for the earliest group of Pennant invoices due in 60 days. Bruce made no claim of offset or deduction for yarn supplied although Lurie on January 13 had written Selman advising him that all invoices had been assigned to Maguire. Maguire Exh. 8. Most, if not all, of the remaining invoices were not due for payment to Maguire until February or March 1969. Bruce never paid them, the only apparent reason being, as stated by the bankruptcy judge, that they "were rejected upon the ground that it had offsets for unpaid yarn", supra n. 3.

Whatever the reason, it is indisputable that Bruce's refusal to pay the remaining invoices to Maguire came only after Lurie informed Selman in late January or early February that Pennant would have to suspend operations on Bruce's uncompleted orders for lack of funds. That suspension followed upon the sudden depletion of Pennant's credit balance because of protective action taken by Maguire for reasons unrelated to the Bruce transaction. Pennant had been in dispute with Sunberry Textiles, a dyeing and bonding company, complaining that Pennant goods had been ruined by improper dyeing. Maguire was also the factor for Sunberry and Maguire Exh. 13 shows that in January 1969 Maguire made a charge back of approximately $64,000 against Pennant's account for assigned accounts receivable, which its own witness identified as related to the Sunberry matter (Tr).
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As of December 31, 1968 Pennant had a credit balance with Maguire of $76,921.18. After the Sunberry charge back, it was left with a January credit balance of $21,483.64.

With the flow of working capital cut off, Pennant closed its doors in or about February 1969 and instituted Chapter XI proceedings in the Southern District of New York, apparently remaining for a time as a debtor in possession. As of August 1969, however, Pennant was adjudicated a bankrupt.

The record is clear that Bruce made no claim in Pennant's insolvency proceedings but is silent as to Maguire's participation therein. It can be safely assumed, however, that Maguire was a creditor with unsatisfied claims against Pennant, for it sued Lurie in the Supreme Court, New York County -- presumably upon his individual guaranty -- and obtained a judgment against him in the amount of $105,087.85.
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Maguire thereafter garnisheed his current salary -- an event which undoubtedly explains Lurie's effort to discharge the debt in this personal bankruptcy.

Objecting Creditor's Contentions

Maguire contested Lurie's right to a discharge basically on the contention that Pennant obtained continued cash advances from Maguire by assigning invoices for the shipments to Bruce which were "in fact subject to almost complete setoffs by Bruce" for yarn supplied to Pennant, supra n. 2. The assignments were made on ...

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